SAI: The Labels Will Kill Ad-Supported Music

Silicon Alley Insider raises a good question—can ad-sponsored streaming music services ultimately survive?—investigates it, and then answers it: They can’t.

The problem is a basic mismatch—on the scale of an order of magnitude—between what advertisers are paying for the ads, and what the sites need to charge in order to compensate the labels properly. Here are some of the numbers, quoted from the report:

“The basic economics: A song lasts 3.5 minutes. The majors have been asking for a penny each time one gets played. Let’s say the site shows a new ad every time the song changes. To break even the site needs to sell one ad per song at the rate of one penny a song, which gives you an effective CPM (or cost per thousand impressions) of $10.”

But that’s not feasible in the real world, unfortunately. “Sites don’t earn that kind of rate even with 100% sell-through,” the report said. “And even if it were feasible, it leaves no room for the rest of the business. They have other costs. They need to earn a profit… otherwise investors will move their money out of music-related products into royalty-free products like search engines.

“A $1 effective CPM is closer to the mark. Which means that Myspace, Google, and Facebook need a 10x price reduction—down to a tenth of a penny per play— to make this business work.” But the labels see this as unreasonable. Instead, they prefer to sell music by the piece, which is iTunes model. “The majors gross about 70 cents per download at the iTunes Store, which is 70 times what they are proposing for an ad-sponsored play,” the report continued. “And a tenth of a penny per play is only 1/700th of that! So naturally, the price change is freaking people out.”

But there’s still a wild card here: volume. Almost everyone listens to the radio. Comparatively few people buy CDs (about 15% of the population), and much fewer than that currently buy music online. But since everyone listens to the radio, everyone could move over to ad-supported streaming services. In other words, there’s potential, but right now the labels are too afraid of streaming radio.